Buy Stocks On Credit: The Benefits And Disadvantages
For many, the mortal sin of investing, for others the opportunity to make a real cash outlay at a low price. Buying stocks on credit is one of the most controversial topics when it comes to stock trading. Which advantages and disadvantages this method brings, we break down in this article.
Take credit for stocks?
Due to the dynamics of the stock market, there are always opportunities to enter the stock market. Price jumps of 10, 20 or 50% you would not want to miss. However, if all the reserves are already invested or you can not access them yourself, then probably every investor flirts with the idea of stocks on credit. However, such a business involves some risks. Before deciding on a loan, you have to be aware of the potential risks.
The following explanations of the advantages and disadvantages are intended to help in the formation of opinions, in order to finally make your own decision.
What shares speak for on credit
The positive aspects of stock buying on credit are primarily dependent on the current market situation combined with higher investment opportunities.
- Larger trading volume
At the same time, a loan increases one’s own capital, which can be used to buy larger sums of stock. As a result, potential dividend payments increase tremendously, price gains have a multiple effect. At the same time, the transaction costs for high stock purchases are not as significant as for a smaller order volume.
- Use favorable opportunities
If you opt for a loan, you have to pay back the amount of money including interest. Looking at Amazon’s price gains over the past five years, for example, this translates into growth of approximately 424%. In the German area, the pharmaceutical supplier Sartorius achieved an above-average increase of 537%.
An investment of 10,000 euros in Amazon five years ago would be worth 42,400 euros today before deduction of taxes. You would have won back the loan of 10,000 euros many times over. The same applies to strong price falls. If you buy stocks on credit at the bottom of a company, you benefit most from a price recovery or potential price growth as more money could be spent.
What speaks against stocks on credit
Despite the benefits, a planned approach is very important when it comes to credit. This does not just apply to consumer credit. Rather, high-risk speculation or emotional action on the stock market is the cause of high debt.
- Uncertain forecasts
On the stock market it says: Return comes from risk. Investors who buy shares on credit are speculating on a sharp rise in share prices. Although the return may be higher, the risk has increased by the same factor. Not the own capital is at stake, but debt, which one does not possess by definition.
And no one can predict that a stock will make such an extraordinary profit as Amazon or Sartorius. Easier, steady price gains reduce the actual net return as the loan still has to be paid off. The profits must be so extraordinarily high that it is worthwhile. In fact, such securities are the exception. The market is irrational and can not be calculated. The odds of speculating wrongly are far greater than making the right investment.
- debt spiral
Not infrequently follows from a loan the well-known debt spiral. If the set credit limit for the investor is not enough, will be further increased – you smell the fast money.
However, it is problematic if the prices fall faster than expected and the loan can no longer be paid. Furthermore, one would like to make up for the losses made, recover the lost money back. Loan is followed by credit and credit. The debt spiral has reached its greatest extent. As a result, not only the total loss is in the house, but also a high debt with it.
- Psychic component
The stock market is characterized by strong price fluctuations. High price drops are the rule and provide some investors with sleepless nights. At such moments, the influence of mental factors is greatest. Rationality often takes a back seat. The fear of loss is high and stocks are sold early at a loss. With shares on credit these fears work all the more, because the money finally does not come from the own pocket. For die-hard hedge fund managers this will probably be less of a problem, but for the hobby investor already.
Not for beginners
Anyone who buys shares on credit knows what he is doing – at least he should. For this reason, the method is suitable for anyone who has discovered investing for themselves. Anticipating price fluctuations is a difficult task that should not be underestimated. Even the best investors therefore advise against buying shares on credit. On the other side there were and will always be price jumps. Anyone who has gained experience is advised to take out a loan for shares.
You can get a good overview of possible loans via our own credit comparison. With the appropriate loan amount and term, you enter “Free Use” as the purpose. Then the best offers are picked out for you.
To our credit comparison
If you want to take your stock business to a new level, then loans are a great choice. Increased capital increases your chances of winning. Conversely, the risk is increased by the same amount. That’s why buying stocks on credit is not for everyone. It takes experience, perseverance and inner peace. After weighing the opportunities and risks, you finally have to make your own decision.